Trade War Update: Trade Deficit Jumps by Most in 3 Years

UPDATE — September 5, 2018: The U.S. trade deficit widened for the second straight month in July, reaching its highest level since February as imports hit an all-time high, according to the Commerce Department.

The deficit in goods with China and the European Union set records.

The deficit in goods and services — the difference between what America sells and what it buys from other countries — rose to $50.1 billion in July from $45.7 billion in June.

Exports slipped 1 percent to $211.1 billion, while imports increased 0.9 percent to a record $261.2 billion on increased purchases of trucks and computers.

The deficit rose despite President Donald Trump's efforts to bring it down by renegotiating trade agreements and imposing taxes on imports, as described below.

Countable's original story was published on August 3, 2018:

The story

The burgeoning trade war between the U.S. and other countries – primarily China – continues to heat up. We take a look at the rationale behind it, the criticism of it, and the current state of play.

What is a trade war?

Essentially, a trade war arises when a nation imposes tariffs or quotas on imports, and foreign countries retaliate with similar forms of trade protectionism.

Why this trade war?

President Donald Trump has two primary complaints: that foreign imports are a “national security threat” and that trade – particularly the trade deficit – with China is “unfair.”

National security threat

Congress is the only U.S. body authorized to impose tariffs. Trump used a special power, granted by Congress in 1962, that allows a president to curb imports that threaten national security.

The Commerce Department reported that dependence on imported metals threatens the U.S. ability to make weapons. But the Aerospace Industry Council said Trump’s tariffs would instead raise costs for the military and exporters.

Trade deficit

Trump has made many statements condemning the U.S. trade deficit with China.

Many economists don’t share his concern. The National Review summarizes their thinking:

“A trade deficit is nothing like a budget deficit. Each year’s federal budget deficit adds to the total debt owed by the federal government. Trade deficits don’t do that, which is one reason why ‘trade deficit’ is not a very useful term. A trade deficit is just a bookkeeping entry, not a debt that has to be paid. Countries don’t trade — people do. Americans are no more harmed by the trade deficit with Germany than you are by your trade deficit with Kroger.”

That being said, China does want to reduce its trade deficit. China’s economic reform plan is to become less reliant on exports. On May 10, China agreed to import more U.S. products.

Fairness

In March, the United States Trade Representative (USTR) released a report finding that China was conducting unfair trade practices related to technology transfer, intellectual property, and innovation. Economists are generally more sympathetic to these concerns. The Peterson Institute for International Economics (PIIE) explains:

“At the core of the Trump administration’s dispute with China lies a real problem—China’s persistent misappropriation of foreign technology… A broad range of experts and market observers agree that China has repeatedly forced foreign multinational corporations (MNCs) to transfer technology to indigenous firms as a condition for market access and that China has persistently failed to protect the intellectual property of foreign firms doing business in China.”

That said, PIIE takes issue with Trump’s “indiscriminate tariffs,” and favors “carefully targeted sanctions.”

What does Trump want from China?

On May 4, 2018, the Trump administration presented China with five demands. It asked China to:

• End subsidies to tech companies.
• Stop stealing U.S. intellectual property.
• Cut tariffs on U.S. goods by 2020.
• Open China to more U.S. investment.
• Reduce the trade deficit by $200 billion by 2020.

What impacts are we seeing?

Tariffs can confer a competitive advantage on domestic producers of the relevant product. For instance, U.S. steel manufacturers are enjoying blockbuster profits right now.

However, domestic industries that rely on imported raw materials can suffer, and retaliatory tariffs can compromise demand. For instance, the U.S. car industry is already experiencing negative effects, and is bracing for “the big tsunami that will come” if the trade war expands.

Meanwhile, farmers have also been absorbing the brunt of China’s retaliatory tariffs.

The International Monetary Fund’s historian warns that trade wars have been “fantastically disruptive” in the past.

Where do things stand now?

The PIIE provides a handy timeline of the evolution of the trade war so far.

On July 10, 2018, the Trump administration announced it would impose 10 percent tariffs on another $200 billion of Chinese imports. They won’t go into effect until after public hearings scheduled for August 20 to 23.

The tariffs would raise prices on a variety of consumer goods, including fish, luggage, tires, handbags, furniture, apparel, and mattresses.

China announced on Friday that it would impose retaliatory tariffs on $60 billion worth of U.S. imports, in which case Trump plans to add tariffs until all $500 billion of Chinese imports are affected.

That could threaten shale oil exports, which are a critical element of the administration’s aspirations for energy independence. China buys 20 percent of U.S. oil exports.

What do you think?

Do you support Trump’s trade policies? Why or why not? Hit Take Action to tell your reps what you think, then share your thoughts below.

—Sara E. Murphy

(Photo Credit: iStock.com / andriano_cz)